What is the best way to stimulate an economy? Is it best to lower taxes or increase wages, both or neither? These are questions which both Democrat and Republican politicians debate in the course of attempting to determine the best path for growing the U.S. economy. For the most part, Republicans are prone towards supply side economics or Reaganomics. On the other hand Democrats seem to want to balance the purchasing power by driving demand through raises in minimum wage and other government stimulus instruments and legislation. This hub takes a brief look at both supply side and demand side economic theories.
Supply Side Economic Theory
Supply side economics is the type of economic theory espoused by Ronald Reagan and most in the Republican party. Supply side theory is aimed at increasing the supply of goods and services available to consumers. The idea behind this economic theory is that if you keep corporate taxes down then businesses will have more money to spend on research and development of new products and services. The wider the variety of offered products and services the more apt consumers will find something that they think they need or want. Apple's I-series products are examples of creating new demand by producing an innovative supply of new goods and services. The greatest danger of supply side economic theory is long-term deficits which will weigh heavily on the future economy.
Demand Side Economics
The opposite of supply side economics is demand side economics. Demand side economics is all about increasing demand in the consumer. This has been referred to as Keynesian economics. The idea here is that the quickest way to spur demand is to increase the relative wealth of the people who want to make purchases. This theory is mostly espoused by liberal Democrats who want to redistribute wealth by taking extra income taxes from corporations and the rich in order to redistribute it to the middle class and poor. Two ways to increase demand are to create jobs and raise minimum wages. Tax rebates and tax cuts are two other ways to increase discretionary funds to drive consumer spending. One danger of too much consumer demand is inflation.
Supply Side vs. Consumer (Demand) Side Economics
Joel on June 19, 2018:
The supply-side theory doesn't make any sense to me, and yet while I do not subscribe to either Rep nor Dem party, I typically agree with the Rep's economical approach because it reduces government interference in the naturally self-balancing effect of supply and demand; and for the (few) Reps I've completely agreed with, I've never heard them indicate they take the supply-side theory given above. In other words, the idea that Reps try to stimulate the economy by giving large businesses greater resources seems quite misguided, and possibly sourced as a strawman by some Dems that want people to think the Rep's approach is insensible (and of course misrepresentation goes both ways).
I think what makes most sense is maximizing the economic wellbeing of both consumers and producers, by minimizing the tax load (by reversing the continual bloating of the government, by helping people realize the government is not the solution to our core problems), which allows consumers to have more and create more demand, and producers to have more and hire more jobs and thereby create more supply. Just wanted to throw that out there since this position is excluded by both the article and the pole.
Aidan Thetford on May 21, 2018:
Economics is not as good as physchology
cam on December 18, 2017:
"redistribute wealth to the middle and lower classes" is a bit misleading and a reason for the right's hysteria with any idea anti-Reganomics.
It's not like demand-side calls for taking cash out of the upper class' wallets and stuffing it in the wallets of the lower and middle class. It's the idea that taxes can actually make life easier and more affordable for the middle-lower class.
olum on February 06, 2017:
sanchita on December 27, 2011:
where is the difference !!!
eren on October 27, 2011:
ok right now i'm having alittle trouble understandin the difference sin i'm just learning about can you please contrast both of these theories in way that maybe a $th grader can understand pleas and thank you:)
ecoggins (author) from Corona, California on October 25, 2011:
Darius, Thank you for the note. I think I can see how this hub is less than definitive and leaves a reader more confused than enlightened. For one thing some key words in the supply side section were left out (now fixed). Secondly, there are references at the end of the demand section about how lowering taxes for the consumer also stimulates demand. This leaves the reader wondering if tax cuts are suplly side or demand side? Finally, the hub is very much too simplistic. This subject needs more than 250 words to make sense of the matter. Some time in the near future I will research the subject again and make this hub more informative.
Darius Harris on October 25, 2011:
I don't understand what this passage is supposed to be showing me about the differences between supply and demand!!!!
Jessica on October 24, 2011:
Can you tell me your first and last name? I'd like to cite this article for a paper I am writing.
ecoggins (author) from Corona, California on September 29, 2011:
Andrew, Thank you for your input and insights. You are right; economics is way more complicated than this simplistic article portrays. I look forward to reading your articles.
Andrew Zanegin on September 29, 2011:
Supply and demand interact. Theoretical dichotomy-accepting either keynesian theory or supply-side theory is a gross simplification of the real system. I invite you to read my hubs on the issue(not only that):
ecoggins (author) from Corona, California on January 19, 2011:
Sir Mr. Gregory, thank you for pointing out my error. I am not above being wrong nor am I unwilling to be corrected. As for Your chastisement of Reaganomics, I wholeheartedly agree with you. The problems we currently face economically is due to a failed economic policy which the U.S.has followed since Reagan took office. So, please accept my apology for crossing my metaphors and definitions.
Gregory on January 19, 2011:
Keynesian economic theory is not supply side economics, it is demand side. Heyak or Chicago School economics is supply side brought to us here by Ronald Reagan and to Brits by Maggie Thatcher. They both read one to many Ian Rand books.
Lori J Latimer from Central Oregon on August 09, 2010:
Thank you for this Hub. I like what you have to say.